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The serial transactor advantage The rise of the cross border transaction

Market share – target nation

Market share – acquirer nation

Trends in Cross-Border M&A activity

Regional Growth versus Maturity

Average deal values begin to rise sharply around three to five years after M&A first emerges in a developing market.

Investors have transacted in emerging markets since the dawn of global trade. But over recent years, two key motivations have crystallised for many buyers: access to markets and access to raw materials.

The number of deals involving China has risen as transactors seek to take advantage of 8% GDP growth rates and increasing disposable income. Similarly deals are often done in Africa to acquire raw materials such as gold, copper and rare earths. But to assume that these two motivations are the only reasons for acquisition in emerging markets is naïve.

Transactors from mature markets are increasingly buying technology and engineering skills from developing market businesses to leverage within their home markets.

In the year to date, acquisitions of emerging market companies constitute 40% of total global deal volume. This represents a doubling of overall levels over the last decade.

As our analysis of transaction patterns shows, average deal values begin to rise sharply around 3-5 years after M&A first emerges in a developing market. Those that undertake a series of deals in nascent markets now, are therefore likely to reap rewards whilst others struggle to find growth.

Whilst acquisitions in emerging markets are far from new, the trend for rapid growth market transactors to acquire overseas is less well established. With strong growth, strengthening currencies and a desire to obtain brands, technology and market access, it is hardly surprising that those in emerging markets are buying in mature economies and in other rapid growth markets – often as part of a series of deals.

This year, 21% of deals have been by emerging market acquirers. It is only a decade since such buyers made up less than one in ten. Clearly buyers in these markets see the value of cross border transactions.

Cross border M&A activity has been an important part of the transaction landscape for decades. The level of activity however varies over time, driven by trends in economic outlook and capital availability. During the last two cyclical peaks in 2001 and 2007, cross border activity reached 27% and 26% respectively.

Few would claim that 2011 is a typical peak year, so in this context, it may surprise that 25% of deals this year have been cross border. Whilst fluctuations in currency value may have had an impact, this would nonetheless suggest that cross border activity, at around a quarter of overall levels, may be becoming the norm. But this level is surely relatively low in contrast to the returns on offer?

Some businesses are seeing the potential despite volatility. Our October 2011 Capital Confidence Barometer, a survey of over 1,000 business leaders, shows that 41% intend to undertake acquisitions in the next 12 months – a rise of 3% on six months ago. Given increasing concern about prospects in developed markets, it seems feasible that those wishing to spend cash, or undertake a series of transactions, are likely to look for cross border deals.

Finding the right marketThe appetite for and value in cross border transactions is clear. But which markets offer the greatest opportunity?

Our analysis identifies markets which are likely to offer significant potential in the next five years based on a combination of market maturity (ease of doing M&A) and market potential (GDP growth expectations).

As one would expect, developed markets are highly mature, yet offer relatively low growth. Conversely Africa is enjoying rapid growth, but is difficult to access, hence the opportunity for value, providing you can navigate local challenges. On a combination of both measures, Asia actually appears to offer the greatest potential.

But this opportunity has already attracted much attention, leading to full pricing on many recent deals. The message to take from this data is that each market offers a mix of risk and return and buyers should evaluate accordingly.

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